Social investment isn’t working. There was only £4.5m of unsecured lending to social enterprises in 2016. So said Steve Wyler, trustee of Access: the foundation for Social Investment at the launch of the Connect Fund in mid-June.
Social investment is working very well. Big Society Capital’s impact report tells us there was £306m of ‘risk’ investment in 2016: “versus £20m in 2012, an increase of 15x“.
Social entrepreneurs in Scotland aren’t interested in social investment. Laurence DeMarco from Senscot explains: “What we call social investment is based on an intentional misrepresentation – to which the English govt, is party; namely that the third sector can be sustained through loan finance – when everyone knows it can’t… Substantial social lenders are increasingly rejigging funds to get money out the door – but they’re still speaking to a market that doesn’t exist.”
Social entrepreneurs in Scotland are very interested in social investment. This Twitter thread from Alistair Davis of Social Investment Scotland includes the point that: “The Social Investment Scotland team have approved 10 loans in the last 6 wks worth £2.2m- doesn’t suggest a non-existent market.”
As a social entrepreneur considering whether social investment is for you or a government minister, Quango boss or grantmaking trust CEO considering whether (or in in what form) to provide more subsidy for the market, you might find all of this slightly confusing.
Is social investment failing dismally to provide charities and social enterprises with risk finance or is there 15 times as much risk finance available now as there was five years ago?
Is Scottish social investment a non-existent market based on a false premise or a distinctive, unusually successful part of the growing UK market?
As an interested, intelligent person not directly involved in these arguments, you’d be unlikely to imagine that answer to these questions might actually be ‘both’.
The truth is out there
It may seem slightly bizarre that representatives of two organisations with a shared governance structure can have such different perspectives on the facts (as opposed to any analysis of those facts) about what’s happening in the social investment market.
They share an office and coffee-making facilities. If the Big Society Capital team think there’s 68 times as much risk finance available as the Access team think there is, how come it’s never come up before?
The answer is that they’re talking about significantly different things. Access trustee, Steve Wyler’s £4.5m of unsecured lending in 2016 refers to unsecured loans made by (non-bank) social investor members of umbrella-organisation, Responsible Finance, to social enterprises.
Big Society Capital’s £306m refers to any social investment in 2016 that was not secured lending by banks. That (probably) includes Steve Wyler’s £4.5m but it also includes (amongst others): Community Shares, equity investments, quasi-equity investments, social impact bonds and investments made by banks, funds and individuals into ‘profit-with-purpose’ organisations^.
Which of these figures is ‘correct’ depends very much on what your priorities are. For Steve Wyler, the priority is relatively small (under £250k), unsecured loans for charities and social enterprises.
From his perspective: “If you are working in a poor community and you require a small scale loan and you can’t provide security, the social investment market just isn’t there for you.”
Even on that basis the £4.5m figure seems very low – there are several social investors that make small loans to charities and social enterprises but aren’t members of Responsible Finance – but Big Society Capital’s closest comparable figure to this (‘non-bank lending’) was £38m in 2015 and seems likely to be around £50m in 2016*.
Big Society Capital, on the other hand, have a wider perspective on what social investment is for. Explaining their approach, they note that: “Social investment is not a single market or product so we work closely with partners to develop solutions that provide different types of finance to meet the different investment needs of charities and social enterprises and investors. We have aimed to find the appropriate balance of supply and demand in each of the many sub-segments we target, to grow the market and not be the market.”
The additional £250m+ ‘risk’ finance beyond ‘non-bank lending’ is (mostly) not meeting the specific needs that Steve Wyler (and many others) believe should be a priority but that doesn’t mean it’s not supporting significant social impact in other ways.
Unfortunately, to give you a coherent broad snapshot** of what’s going on here, it would take at least two more blog posts:
(i) Looking at developments in the market for small, unsecured loans for charities and social enterprises since 2012 to see whether there’s more of these deals happening and what basis they’re happening on (size of loan, interest rates etc.).
(ii) Looking at developments in the market(s) for other kinds of risk finance which aren’t aimed at relatively small charities and social enterprises seeking relatively small amounts of money but are ‘social investment’ aimed at providing finance to support social impact
Given that I haven’t even got time to write that stuff (let alone expect you to read it) my short answer to the question of ‘who’s right?’ is ‘that depends on what you want to happen’.
And my answer to the question ‘what’s going on?’ is: ‘lots of new stuff has been going on in UK social investment since 2012 but, until now, most of it won’t have made it easier for your relatively small charity or social enterprise to get a relatively small unsecured loan.’
The potentially positive news is: ‘as a result of Access investments, many organisations will now have more chance of getting a a relatively small unsecured loan if they want one.’
Disagreeing to disagree
Viewed from a distance but based on knowing several protagonists on either side, the disagreement between Senscot (and others) and Social Investment Scotland (and others) is not a primarily a disagreement about facts.
It’s an ideological dispute. On one side there is the view that attempting to create a market in ‘commercial’ social investment – where social investors aim to develop a viable business model for investing into charities and social enterprises – is not only practically flawed but morally wrong.
It won’t work (because charities and social enterprises won’t take the money) but also it shouldn’t work (because any charities or social enterprises that did take the money would not be able to pay it back without becoming profitable businesses and diluting their social aims in the process).
On the other side is the belief that, for at least some charities and social enterprises, the money is right and the change in business approach necessitated by taking on the money is also right. That, in some sectors at least, it makes sense for charities and social enterprises who’ve got a proven business model to take on investment so they can become bigger businesses, doing more of what they do in other areas.
Ironically, the Tweeted figures from Social Investment Scotland, when considered alongside the work of others such as Resilient Scotland, suggest that the Scottish social investment market is doing a pretty good job of providing the kind of finance (relatively small loans, often alongside grant funding) that Steve Wyler of Access would like to see more of compared to the the UK market as whole.
But that doesn’t mean the views expressed by Senscot are necessarily wrong. If your focus is supporting (social entrepreneurs running) small organisations with a turnover of under £250k per year (rather than seeking investment of £250k or less), operating in a single local community and just about breaking even with lots of volunteer activity and a few small grants every year, even Scottish-style social investment isn’t much use to you.
I think I’ll go and sit down over there – let me know when you’ve sorted it out between yourselves
There’s nothing wrong (in the moral sense) with the fact that different organisations and groups of organisations have different perspectives on and priorities for the social investment market***.
One negative alternative, the position of many leading figures in English (some would say ‘London-based’) social investment market between 2010 and 2014, is to avoid discussing differing priorities and promote the idea that ‘social investment’ in whatever form is an inherently good thing that should be supported without question.
But, if we’re trying to make the market easier for charities and social enterprises to navigate, we do have some (collective) responsibility to provide a clear picture of what’s going on so that organisations and social entrepreneurs can understand the options available – and make their own, properly informed judgements about what’s right for them.
While there’s no suggestion that anyone is deliberately not doing that on an individual basis, when current contributions are taken together, the combined picture is a painting of a surrealist’s dog’s dinner.
Part of the solution is more independent data, with clear analysis to explain what that data refers to and clear independent information about products and support on offer. But alongside that, we all have an individual responsibility to be as clear as possible about what we mean.
^For the purposes of this blog, there is no need to know what all (or, in fact, any) of these financial instruments are – beyond the fact that they’re different kinds of investment to the ones Steve Wyler is talking about
*Big Society Capital have not yet published a breakdown of their 2016 market figures. The 2015 figure that is directly comparable to the £306m ‘risk’ finance figure for 2016 is £283m.
**Exploring the detail would need a research project.
***That’s before we even get on to the relationship with wider world of ‘impact investment’